— Financial Times
By Richard Milne
Any company looking at access to financing in 2009 would have faced a bleak prospect. Markets were closed and banks were often unwilling to extend credit even to the healthiest of names.
Fast forward two years and the change is remarkable. Credit may still be difficult to obtain for many small companies, but for the biggest this is something of a gilded epoch. Never before has money been available at such low rates.
“It is a bit of a golden era,” says Marco Baldini, head of European corporate syndicate at Barclays Capital, the investment banking arm of the UK bank. “It is a very good time to issue debt. It is a sellers’ market.”
The main reason for this has been the incredibly low official interest rates in the US, UK and eurozone since the financial crisis broke. In the bond markets, spreads – the premium above government debt costs – have been average to fairly high. But the all-in cost of funding, judged by interest rates or yields, has never been lower.
Recent months have even witnessed an unofficial battle to see which company could get the cheapest funding costs ever. Wal-Mart, the US retailer, gave investors an interest rate (known as a coupon) of just 0.75 per cent when it issued three-year bonds late last year, an interest rate matched by Coca-Cola, the beverages group, soon after. Colgate-Palmolive, the consumer goods company, issued five-year money with a coupon of 1.375 per cent, while Johnson & Johnson, the US healthcare group, and Microsoft, the technology company, have also sold bonds to investors in recent months at rates that could only have been dreamed about during the crisis.
All this has enabled companies to get their balance sheets in order quicker than many imagined possible in the dark days following the 2008 bankruptcy of Lehman Brothers, the former investment bank. “If you had told me at the start of 2009, when markets were all but closed, that I would be able to borrow at the prices I can do now, I would have said you were mad,” says the corporate treasurer of one of Europe’s largest companies.
The phenomenon is playing out differently on each side of the Atlantic. US companies have been opportunistic, often issuing debt not because they needed it, but because they could lock in cheap rates. Europe’s biggest groups, on the other hand, have been more reluctant, as they had secured a large amount of funding in 2009 at higher rates.
“The whole mindset is very different [in the US]. Chief financial officers and treasurers are much more flexible and ingenious when it comes to financial planning,” says Mr. Baldini.
But away from the biggest companies with their investment-grade credit ratings, the story is different.
In both the US and Europe, so-called high-yield debt issuance (another name for junk bonds) has boomed. This is particularly striking in Europe, as it demonstrates how mid-sized companies are increasingly turning to the capital markets rather than banks for their financing needs. European companies have traditionally received about two-thirds of their funding in loans from banks and only about a third from the bond markets. In the US it is the reverse.
Bankers in Europe now see the opportunity for a shift, as companies start to shun banks because loans have become harder and more expensive to obtain. The number of first-time debt issuers in Europe hit a new peak in the first four months of this year, with 27 companies raising €12.9bn ($18.3bn).
Corporate debt is attractive to investors at the moment for a number of reasons. Given that official interest rates in the west are still historically low, they are keen on the extra payment they can receive from companies. The so-called “search for yield” is what has led to such cheap financing costs for companies.
Another reason is that with a sovereign debt crisis roiling the eurozone (and even rearing its head in the US), investors see corporate debt as safer than banks, and even governments in some cases. “On a cost-of-funds basis, markets are offering companies some incredible bargains. You have never had a time where corporations are seen as a safe haven compared with banks,” says Mr. Baldini.
As official interest rates begin to tick upwards, these bargains are unlikely to persist at the same levels – the European Central Bank led the way in April when it raised eurozone interest rates from 1 per cent to 1.25 per cent. That explains, say bankers and executives, the recent strong activity, especially in the US, as companies scramble to secure financing before rates go up. Still, few expect a sharp rise in borrowing costs in the foreseeable future.
Europe continues to lag far behind the US in the depth of access to capital markets. Small- and medium-sized companies – those with up to 250 workers – make up a higher proportion of businesses and GDP in Europe, yet nearly all remain heavily dependent on bank financing.
The debate continues as to whether banks are being more restrictive in granting credit, as companies claim, or whether businesses are demanding fewer loans, as banks say is the case. Politicians across Europe are still angry with banks for supposedly not doing enough to support the recovery by lending more. Most recently, UK officials criticized figures from the Royal Bank of Scotland showed gross new lending in the first quarter of this year was down 7 per cent on the same period a year earlier. Stephen Hester, the chief executive, insisted that demand for credit by small business remained muted.
But there are signs of growing credit availability in other countries. The strength of the German economy was underlined by the recent credit constraint indicator from Ifo, the economic research institute. It showed that the number of companies reporting restricted access to bank loans was at its lowest since the survey started in 2003. Only 23 per cent of companies complained of difficulties in getting loans.
In the US, meanwhile, banks eased lending terms in the first quarter, according to a recent survey by the Federal Reserve. More than half the 55 domestic banks surveyed reported improvements in the credit quality of the largest corporate loan applicants, while about a third saw similar improvements in small businesses.
The outlook is still cloudy, however, not least because of the effects of tougher banking regulation such as the Basel III rules on capital. A third of risk managers in a recent European credit risk survey thought Basel III would lead to restriction of credit to consumers.
Risk managers continue to fret about a situation where the demand for credit increases faster than banks can provide it. “Consumers and business owners in many countries are likely to perceive a ‘credit gap’ for some time,” says Mike Gordon, European managing director of Fico, the US credit score company, who adds that a similar trend has been observed in the US.
“While moderate differences between the growth of credit demand and supply are to be expected, the economy’s growth in most of Europe depends on the ability of consumers and businesses to get credit,” he says. “This means that weak credit availability could slow economic growth in Europe for the foreseeable future.”
Bank lending fails to keep up with global credit demand
When HSBC’s new chief executive unveiled his vision to shake up the bank earlier this month, few observers were surprised that his plan involved lending more in Asia. In the first quarter of this year, HSBC’s lending volumes rose by $39bn, with much of that growth coming from its Asian heartlands.
Unlike the UK, US and much of Europe, where the effects of the financial crisis have been felt most acutely, demand for credit in these fast-growing markets has continued unabated. In fact, appetite is so great that some analysts have raised the alarm about a new credit bubble brewing in Hong Kong and China.
This stands in stark contrast to western markets, particularly the UK, where, more than two years after the peak of the financial crisis and despite repeated agreements with the government to boost the availability of finance, banks are still accused of failing to lend to businesses.
Recent data compiled by the Bank of England showed that net lending – new lending minus repayments – from the five biggest British banks was minus £2bn ($3.2bn) in the first quarter of this year.
Meanwhile, gross lending by the major UK banks was £27bn over the same period – meaning they are a long way off a target agreed with the government to provide £190bn of new business loans this year.
The environment remains most challenging for small and medium-sized enterprises, which politicians claim are being denied access to bank funding as they pose too great a credit risk.
The Royal Bank of Scotland and Lloyds Banking Group, the two state-backed UK banks that have been under intense political pressure to make finance available to SMEs, blame a lack of demand for the still-muted lending to this group. RBS reported a 7 per cent fall in gross lending for the first quarter.
However, signs are emerging that larger corporations are increasingly able to access bank funding, with demand picking up in March after a slow start to the year.
A similar improvement took place across Europe, where banks have reported a “notable” jump in credit demand from businesses this year as they rebuilt inventories and working capital.
But the recovery is fragile – the European Central Bank has highlighted evidence that the eurozone banks have tightened credit standards significantly, an unnerving sign that demand could well slip back again later in the year.